We've recently seen significant underperformance in shares of Raptor Pharmaceutical Corp (NASDAQ: RPTP), which is nearly down 15% in the last month of trading. If you compare that performance to the iShares Biotech Index (NASDAQ: IBB), which moved up about 1% in the same period of time, you can see that there is an abnormally bearish outlook on Raptor for some reason.
This trend is also shown with the company's cumulative short interest, which has been rising quite consistently since August 2012. As of January 31st, nearly 7.3 million shares (or 14.3% of float) of RPTP is held in short positions.
So what exactly are these bearish RPTP traders chasing?
It seems that there is significant interest in bets against the FDA approval of Raptor's flagship drug RP-103, which is a post phase III drug that is being developed as a treatment for nephropathic cystinosis, as well as Huntington's disease. Nephropathic cystinosis is a very rare recessive genetic disorder that causes major developmental problems, particularly in the kidneys of infants, and affects about four to five hundred people in the United States alone.
Renal transplants can extend the lives of patients with cystinosis, although there is a significant worldwide shortage of suitable organ donors (especially kidney donors) and an obvious need for efficacious treatments.
A breakthrough was made in the 1990s with the FDA approval of Cystagon (cysteamine), created by the drug developer Mylan (NASDAQ: MYL).
One of the big issues with RP-103 right now is that it doesn't bring a new compound to the table, and simply makes an improvement to cysteamine therapy by making a delayed-release version of it. Patients that take cysteamine for the disease seem to greatly prefer RP-103 compared to the original (due to the simpler dosing schedule and lessened side effects), although it is generally agreed that the drug will be priced significantly higher than Cystagon.
Many numbers have been thrown around for the potential pricing of RP-103. It does have orphan drug status, and should have quite a bit of pricing power although the company will want to avoid reimbursement issues as much as possible given how limited their target patient population is. Assuming that RP-103 was priced at $75,000 per year per average patient, and assumed that the drug is given to three out of every four nephropathic cystinosis patients after it has time to "saturate" this drug market, we can roughly estimate $30 million in annual sales for this drug in the United States alone.
It's much harder to put figures on the world market, but if we rounded out RP-103's potential to $50 million in annual sales we can begin to see how RPTP gets a valuation of ~250 million. At seven times peak revenue assuming that they price the therapy at roughly $75,000 per year, the stock seems to be priced quite reasonably.
Investors who are interested in Raptor should note that the PDUFA action date (or the FDA decision date) for RP-103 is on April 30th, 2013. I'd imagine that speculation on Raptor will be rising ahead of this crucial day, since it will determine whether or not the company can potentially market the drug later this year or in 2014.
Following a likely FDA approval of RP-103, it seems that Wall Street will be very concerned with the pricing of the therapy since this will directly determine the maximum sales potential of the drug. As pointed out by others, Raptor likely won't be able to price RP-103 past a certain amount due to the availability of a substitute (cysteamine). Remember that RP-103 is not introducing a new active ingredient, but is simply improving upon a breakthrough that has already been made. This limits its overall potential in the market, and should keep a lid on Raptor Pharmaceutical's valuation.